School Employee Retirement Costs and the House of the Rising Sun

Most people know by now that Lansing is by far the most significant source of school district funding.  Lansing is also the unilateral source of our second largest expense – employee retirement costs.  Lansing sets the rates and we pay the bill – a financially lethal combination that puts local school boards in an unenviable predicament.

Last Monday, January 11th, the Grosse Pointe Public Schools Board of Education had a marathon budget planning Work Session that could best be described as miserable.  My personal projection is that we will unfortunately have to terminate the employment of over 60 district employees – all of them good people who add value to our mission and who are valued in return.  But we cannot ignore our economic reality.  The cuts are coming – hard and fast.

graphWe collectively stare down the barrel of our most daunting projected budget shortfall in the history of the district, brought about equally by Lansing’s wretched policy making combined with a Depression-level state economy.

I cannot repeat enough that Lansing is the largest source of funding for every public school system in the state of Michigan.  Lansing controls our per pupil revenue.  Lansing has cut our per pupil revenue this year resulting in the loss of $3,000,000 and is making plans now for cuts next year that will result in the loss of another $2,200,000.  Meanwhile salaries and health care costs rise and student population is shrinking.  This is the financial stew that is our sustenance.

The focus in this post is another ever increasing cost which, after salary, is our second largest expense – employee retiree health and pension costs – referred to as the Michigan Public School Retirement Systems, MPSERS.  Lansing unilaterally controls the rate of this expense.  To put this in perspective, if we receive roughly $10,000 per pupil for school funding, nearly $1,300 of it goes to employee retirement.

Here’s a graphic developed by the Detroit News to project where we are headed in this expense category.

MPSERS Graph 1

Take a look at the chart below that represents the steady rise of the MPSERS rate over the last 10 years in a slightly different way.  Take special note of the real source of the expansion, the Unfunded Accrued Actuarial Liability.  This is the greatest peril of defined benefit systems.

MPSERS_10 Yr Trend

I have referenced MPSERS many times, most recently in an entry about employee salaries.  The two are inextricably related because the MPSERS rate is applied against salary to calculate the district’s total MPSERS expense.  Since we have the highest teacher salaries in the state, we also logically pay more in MPSERS expense per teacher than anyone in the state as well.

You can learn much more about MPSERS in this installment of the Financial Transparency Series, or in this series from the Detroit News.  You can think of MPSERS as a public employee version of a 401k, except in this case the employer “matching” contribution is nearly 17% of salary and does not require the employee to match what the employer pays.

Here’s a brief snapshot of the rising cost of MPSERS for Grosse Pointe Public Schools.

Impact of State Mandated Retirement Costs in Contrast to Per Pupil Funding in the Grosse Pointe Public School System

2007-8 2008-9 2009-10
MPSERS Rate (applied to all salary expenses) 16.72% 16.54% 16.94%
Average Cost of MPSERS Per Employee $11,000 $10,979 $11,636
Average Cost of MPSERS Per Pupil $1,218 $1,263 $1,293
Foundation Allowance Funding Per Pupil $10,128 $10,184 $9,821
Change of Foundation Allowance v. MPSERS $11 ($363)
Aggregate Impact (applied against enrollment) $91,949 ($2,974,785)

I could spend many words breaking this chart down, but at a high level and in very non-technical terms, it tells us that Lansing is sticking it to us both coming and going.  They control our revenue – and are decreasing it.  They control the rate of our second largest expense, MPSERS  –  and are raising it.

The impact of the two factors in 2009-10 amounts to nearly $3,000,0000 of a massive Lansing unfunded mandate.  This article in yesterday’s Chicago Tribune is well worth the read on the topic of unfunded mandates.

Where will that $3,000,000 come from?  That was the topic of the Work Session I referenced at the outset.  I can assure you that it won’t be pleasant, it won’t be popular, and it will be painful.

“Well, I got one foot on the platform

The other foot on the train

I’m goin’ back to New Orleans

To wear that ball and chain”

In their rendition of “The House of the Rising Sun” The Animals express the applicable lyric above.  For local Boards of Education, the platform is the one provided by Lansing policies.  The train is the local impact of those policies.  As the visual of the song lyric suggests, this is an unenviable position.  It’s our ball and chain.

As we continue along this miserable process of bringing to form the local impact of Lansing’s policy decisions, remember this.  Your local school board is not the source of this distress, but we must respond to it.  The reflex of many will be to shoot the messenger, but that anger is misplaced and unfounded.

I invest in this blog to inform as many people as possible about the stark reality of our condition – hopefully to refine that energy of the inevitable initial anger into constructive and collaborative problem solving energy.

With such an approach, let’s dismount the platform and get fully on the train to financial equilibrium.

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14 Comments

Filed under Current Events, GPPS Budget Decisions, State of Michigan Finances

14 responses to “School Employee Retirement Costs and the House of the Rising Sun

  1. Alice Kosinski

    Given the state of Wall Street, I find it hard to believe that Michigan has not raised the MPSERS rates even more in order to adequately fund the “defined benefits” plan that our school employees currently have.
    Wish my family could afford a defined benefits plan. This is a crucial spot to focus on for negotiations!

  2. Ranae Beyerlein

    There is a house in Grosse Pointe they call the Rising Sun: the GPPSS. Grosse Pointe used to call itself the “Lighthouse District.” During those times, Grosse Pointers were proud to be able to recruit the most talented teachers to its ranks by offering a competitive total compensation package.

    That employee retirement benefits represent a ball and chain to at least one of seven of our Board members is consistent with the tenor of the dehumanizing talks at their budget meetings.

    The previous Board decision to privatize cafeteria employees was that of a gambling man, down in New Orleans. It is that gambling on public employees’ retirement benefits, that is the ball and chain, not our so-called defined benefit plan.

    Our retirement benefits are mandated by law and are not negotiated. If you don’t like that, speak to Representative Bledsoe and his cronies. Be forewarned that has been the ruin of many a poor boy…

    Our health benefits, however, are not mandated but are negotiated. Now many of our uninformed, but good taxpayers want to make our health benefits mandated by law. Likely, GPPSS employees will benefit at the expense of funding them, if Mr. Dillon has his way about that. The GPPSS public should know that our district spends one of the lowest amounts of its revenue on its employee benefits of all of the districts in the state. It does so mainly because the GPEA and the Board have agreed to do so through our negotiated contract. In each contract, we have taken concessions on our health care benefits since the onset of Proposal A. If the legislature approves state-wide benefits, then perhaps mothers will be telling their children not to do as they have done with the retirement plans.

    The taxpayers also need to know that all MIP employees contribute to MPSERS at a rate of about 5%, and most members additionally contribute by “purchasing” years of experience, which are actuarially determined to be cost neutral to the state, at no direct cost to districts or taxpayers.

    The taxpayers should also know that the GPEA members are currently funding their health care costs in a number of ways that other districts’ teachers are not, including higher co-pays on prescription drugs, higher deductibles including a 10% service fee, and others.

    While the GPEA members are doing their part to reduce costs to the district, inaccuracies are being posted in comments and blogs that reflect badly on our profession. People in the private sector want the public employees to make sacrifices in the lean times but during the boom times, we were expected to move forward with minimal raises, increased demands on our professional time, and decreased benefits. Let’s put things in perspective:

    We did not create this recession, nor are we adding to it. We are all experiencing the hardships of the economic downturn through our families. Many members have shared with me that they have lost their homes, that their spouses have lost their jobs, that their adult children are underemployed. Many of us are the wage earners, who are keeping our families afloat during these hard times. Meanwhile we are working harder than ever, doing our best to educate our youth so that we can move forward as a society to more prosperous times for all.

    My mother, literally, was a tailor, although she did not sew my blue jeans. When I began to teach, she fashioned my wardrobe, enabling me to repay student loans. Through hard work and perseverance, educators as professionals, have given of themselves in this community to provide an unrivaled education for our youth. If Grosse Pointe truly welcomes young professionals with families to live in its community, it needs to start by compensating its public employees with a package that would allow them to invest in this community. Do not expect GPEA members to move here in droves, though, as most of us have homes elsewhere that we would like to sell, but can’t because of this economy.

    Otherwise, for laid off employees, and for prospective teachers, it’s back to New Orleans.

    • Brendan Walsh

      Dr. Beyerlein,

      Thank you for your continued contributions to this dialog. It is appreciated. Let’s do as you say and put things in perspective.

      You wrote “People in the private sector want the public employees to make sacrifices in the lean times but during the boom times, we were expected to move forward with minimal raises”.

      As a scientist you know terms like “minimal” and “boom times” are subjective. Perpsective is important. In the time since the implementation of Proposal A, however, it is safe to say Michigan has expereinced both boom and bust.

      In 1996, the first year after Prop A, GPPSS average teacher salaries were $54,832, ranking us 46th in the state among the 550+ school districts. Here are the average increases every year since then and the rank of the GPPSS teachers in the state as a result of the change:

      Year Change Rank
      1997 3.8% 27
      1998 0.5% 27
      1999 4.3% 16
      2000 -0.9% 19
      2001 -0.2% 26
      2002 5.4% 17
      2003 3.9% 9
      2004 3.5% 7
      2005 3.8% 6
      2006 12.2% 1
      2007 1.9% 2
      2008 8.5% 1

      In the Prop A era, GPPS teacher salaries have increased by 57% and actually experienced their greatest rise in the absolute “bust” era of the Michigan economy. So the data does not support your conclusion that teachers have sacrificed “minimal” raises in lean times.

      As far as a comparison of the district’s expenditure on health insurance, in the most recent State of Michigan report, the LEA’s (school districts) of Michigan averaged 13.9% of total expenses on insurance benefits. GPPSS was 12.4%. 77 districts spent a lower proportion on health care. As a scientist you would agree much more would need to be analyzed to determine if the district were procuring lesser benefits than those who spend a greater proportion.

      You must also factor that as a district we receive the 12th highest revenue per pupil. So even though the proportion may be less it does not mean absolute dollars are less.

      But as you say, let’s keep things in perspective. GPPSS ranks 28th statewide in proportion of expenditure for instructional salaries and no district in Wayne, Oakland, Macomb, or Washtenaw counties ranks higher than we do – a fairly obvious position given that no other district in the state pays their teachers more than GPPSS.

      It’s a reasonably safe deduction that since a higher proportion of the GPPSS expenditure goes to teacher salaries that a lesser proportion would go to health benefits. Same holds true for retirement benefits since that cost scales in direct proportion to salaries.

      One last point. You wrote “Our retirement benefits are mandated by law and are not negotiated.” That’s not exactly true. The GPPSS Plant Workers Union contract placed a cap on the amount of the district’s contribution to their retirement which was a critical component to saving jobs and maintaining their excellent service. If you have not seen the contract I am sure we can get you a copy.

      Thanks again for your continued willingness to maintain this dialog.

      Brendan

      • Brendan, I applaud you for taking the time to compile and present the extensive data you have here. The data, by the way, speak for themselves.

        To put this argument into a format Dr. Beyerlein could understand, think of it this way: for each MEA teacher we hire, we are setting aside $2,000,000+ present value dollars in addition to their compensation to fund their pension. There is a point where the public’s gag reflex is such that it will no longer pay an extremely expensive price when there is no demonstrable benefit in continuing to try, especially in a time when revenue is plunging. There will have to be a trust-like structure put into place to take out this unaffordable and outdated model, and then the union members can join the rest of the country by participating in a defined contribution plan (and I would believe their contribution amount is going to be a lot higher than 5%, as they, like the rest of us, will have to assume the responsibility of saving for retirement).

    • Ms. Beyerlein, your New Orleans “gambling man” metaphor is not only insulting to the argument, but, again, off-point. Your argument essentially boils down to this: It is not our fault the automotive economy collapsed, rendering nearly 1,000,000 lost jobs in Michigan, so it is the board’s duty to act as if nothing happened and go ahead and continue to pay for what they cannot afford. Your final paragraph which waxes nostalgically about your mother tailoring your blue jeans is touching, but completely irrelevant to the argument. Those “public employees” work for the public! If the public cannot pay their freight, where do you expect the money to come from? This is the third time I have asked you this question, and I would appreciate an answer.

  3. Dan Quinn

    Brendan,

    As much as I love a good dialog regarding school financing in Michigan, the bottom line is we’re caught in a funding crisis, of which no serious politician in Lansing or anywhere else around the state is serious about fixing.

    Making your draconian cuts at the local level, blaming the dedicated employees of the district for the state’s economic woes, while leaving millions of taxpayer dollars in the bank is problematic to say the least.

    Michigan deserves better. Grosse Pointe deserves better. We deserve better.

    As you can see at the state level, there is no way to make cuts and improve the level of education that we provide. It is impossible as you describe to do more with less.

    Couple this dialog with the fact that the MASB (your union) and the Mackinac Center have taken advantage of the problematic Michigan economy and are using the economy as a means to make gains and concessions in bargaining across the state.

    Regardless of how you spin the numbers to the community, your goal of “transparency” is a thinly veiled attempt at bargaining in public and balancing the budget on the backs of public employees.

    • Brendan Walsh

      Dan,

      I appreciate your comments and value your opinion, but I have to disagree with your logic, which is unreconcilable.

      We clearly agree that there is a crisis. (By the way, not everyone agrees with that. One of your peers accused me of using “chicken little rhetoric” in describing the reality of the situation.) But at least you and I agree there is a problem. We agree that Lansing politicians are the ones that need to fix the problem. This is a good foundation. We have a problem. We can’t “fix” it locally.

      From there we don’t agree so much. You accuse me of “blaming the dedicated employees of the district for the state’s economic woes.” Sorry, but that is pure spin on your part. The problem, succinctly stated, is that state funding is not keeping pace with the rising costs of education. I’ll let the political hacks spin from there. Some want to raise taxes to fix that problem. Some want to cut benefits to fix the problem.

      Locally we CANNOT raise taxes to fix the problem. It is not even an option. So what options remain given that the problem we agree on persists?

      You advocate for the district to use the “millions of dollars in the bank” to respond to the crisis. Perhaps you missed it, but we spent $2,500,000 in response to the Lansing cuts of October 2009. That’s 12% of our Fund Equity. By spending it we saved the jobs, for the time being, of many of our valued employees. But it’s not convenient to your argument to acknowledge that we did this since you want us to be the bad guys.

      And what happens next year when no funding source is in place to cover that $2,500,000? It repeats itself. As an economics teacher, you can see where that leads. It’s unsustainable. It would be a more reasonable strategy if there was ANY hint that the problem we agree on was to be fixed anytime soon. We agree that neither of us is optimistic about that.

      In the big picture the state is allocating fewer dollars to education. 85% of all local school district’s budgets go to “public employees”. You don’t have to be an expert on school funding to know what this means. It is a brutal reality. I didn’t create it, but we agree it is here. I am not blaming you or our employees. I have nothing to gain by doing so.

      You accuse my efforts to educate the taxpayers of the district on the foundational elements contributing to the crisis (that you and I agree exists) as “spin”. If you have a different explanation I encourage you to bring it forward. So far the contrary positions presented are not supported by the facts.

      I’ll reach my conclusions and reach my decisions based on facts, not emotion. For this, I am further accused of “dehumanizing the process.” Yet no one else has brought forth a factual case supporting logical alternative solutions.

      I’ve served on the Board of Education for over four years. I have been delivering bad economic news for four years. I’ve had my teeth kicked in for four years for being the messenger. But I am content in what I know to be the reality and refuse to play the role of the glad-handing, pandering politician by sugar-coating reality. This is serious business and I take it seriously.

      Brendan

  4. Judy Gafa

    All,

    There is a common theme in all of the above and previous blog comments that cannot be stressed enough The problem was created by Lansing. The employees did not create this situation and neither did the school board.

    Every one of us agrees it is an unsustainable model.

    Personally I think if we work together we can weather this storm and force Lansing to create change and fix the school funding issue. If we’re pointing fingers at each other, than we aren’t looking at them to fix this crisis.

    Judy Gafa

    • In response to Ms. Gafa, who submits our problems were created by Lansing, it was the electorate of the state of Michigan that passed both the Headlee Amendment AND Proposal A. The failure was the inability of the electorate to understand that neither proposal contemplated a declining valuation of property. We need to point the fingers at each other and take steps to cause the legislature to fix the flaws in these bills that inadvertently created the structural deficits. In the meantime, we need to take care of our own affairs by living within our means. If that means budgetary cuts, let’s cut the budget in a way that benefits the students.

  5. For Mr. Quinn, I submit you need to try to understand the nature of a structural budget deficit. Every “draconian” cut you make mention to has already been executed by the private sector (which paid a higher level of its benefits cost than the teachers union, by far). You say you “deserve more”, but what does that mean? Mr. Walsh, with his supplied data, shows the union HAS been given more, by a lot! I will ask you the same question Dr. Beuerlein has twice refused to answer: if your household income drops by double digits, and your savings will only cover a few months of expenses, do you keep spending at the same level? Or, like most sensible people, do you reduce your spending to match your ability to pay for that spending?

  6. Ranae Beyerlein, PhD, GPEA President

    I have called for transparency in salaries and haven’t received that from you or any of your private sector blogging buddies, who want to strip our total compensation as public employees.

    As for us teachers, many among our ranks have seen our family incomes drop by double digits. My family’s total compensation package has dipped by 5% with our last contract, due to Grosse Pointe’s contracted compensation alone. My husband is a business man, whose income has been drastically impacted by the economy. Many of our members have lost their homes, and their lifestyles as a result of this economy. My point is, we have all made sacrifices, and we will continue to do so, but we would like to bargain collectively with our employer, in order to decide what those sacrifices will be. Instead, you, Mr. Walsh, and the other bloggers on this site, would like our bargaining to be transparent and public.

    You are in the business of “Eliminat[ing] whole layers of management, increase[ing] management span of control by up to 100%, (and mak[ing] your managers more than just bosses),” according to your website, so your politics and priorities obviously differ vastly from those of my constituents and from my own. My opinion differs about how our taxes are spent, and I obviously differ about how employees should be treated and compensated.

    I do not know if you attended our great schools, nor do I know if any of your progeny benefited from the public education our members provide, but I know that many other bloggers supporting Mr. Walsh (excepting his fellow Board members), either don’t live in our district, or have sent their children to private schools that charge two to three times the amount that the taxpayers pay to educate the children in Grosse Pointe, and five to six times what the tax payers spend to educate children in other districts. As a former teacher in a private school setting, I also know that the extra educational costs do not translate into more income or better benefits for their employees. Nor do they necessarily translate into a better educational experience, as evidenced by most comparisons you can make with our graduates to the grads of most private schools in our area. But that’s another column for another day.

    I don’t know where you are getting your data from regarding public employer contributions toward our defined benefit retirement, as my computations differ. If each teacher made $100 000 per year, which we don’t, and the required retirement contribution were 20%, which it isn’t, and each teacher worked for 30 years, should we be so lucky to be working that long without layoffs, that’s $600 000, not two million. My starting salary was $28 000, twenty years ago, as a part time employee. I have been laid off three times. During the years of my employment, the retirement contribution averaged closer to 15%, so, that means that the Michigan taxpayers (of which I am one, incidentally, and also, incidentally, the state has not spent one penny of any of my taxes in educating or adjudicating any of my progeny) has applied $240 000 toward my defined benefit plan. I am eligible for retirement after next year, and I have yet to earn $100 000 in my base pay.

    Mr. Walsh, I resent the implication that I or the GPEA have/has any responsibility in laying off any of the 18 GPEA members, who are currently on our lay off list, or the 60 you are threatening to lay off this year. The GPEA has repeatedly offered many resolutions to that travesty and your Board has repeatedly denied any of our recommendations. And yes, this is a moral issue, but only when you consider the faces of the people in their families, as I do, every day. I have their faces posted in my office.

    While we believe in right-sizing, we also believe that the Board should abide by its agreed-upon contractual commitments in doing so, and I will continue to work to see that is done fairly, and honestly. Anything less would be a breech of contract, and under these current circumstances, I would consider that to be immoral: giving one’s word, and then not backing it up. A contract is a body of words that we all agree to live with.

    • Brendan Walsh

      Hello again, Dr. Beyerlein,

      I’m sure like everyone else, I sympathize wtih the plight of your loss of household income. But the taxpayers can’t be responsible for the income of your husband. So I can’t help there. Many have lost MUCH more than 5%, I can assure you.

      As for your claimed loss based on “Grosse Pointe’s contracted compensation”, the data very clearly shows that even if that is the case for you personally, it is NOT the case for your entire bargaining unit. As you recall you bargain collectively, not as individuals. And on average taxpayers allocation to teacher salaries, retirement, health care and FICA costs are all significantly up year over year – as is the case every year. This should be a bragging point for you, not a source of complaint. Your members are paid better than any of their peers in the state.

      As I have written before, as individual costs increase and our state revenue falls, we can afford fewer and fewer teachers – at a rate exceeding that of the loss of students. This was my main point on Monday night. You continue to stick your head in the sand and conveniently blame the Board for this, but most reasonable people know the Board is not to blame for this – nor are you. But if it somehow makes you feel better to blame me or the Board, I’m glad I can be of service. Remember, I like to run marathons. I serve on the Board of Education. I can take a lot of abuse for a long time and don’t quite mind it.

      Which leads to your point about the loss of teachers and the contraction of benefits for other employees. I never disputed your view that this is a moral issue, but rather was pointing out that you cannot deny the role you play in that just the same as I could not. I’m being honest about it. Where do you think the money that is saved from the reduction of benefits to your fellow bargaining units goes? If you knew, like I do, the rate of increase in your bargaining unit’s cost on a per employee basis compared to the others I think it would be more clear. You may resent that, but it’s reality.

      Lastly, I am sure you did not mean to imply the district was in breech of contract. You continue to be the highest paid teachers in the state which means taxpayers also fund your retirement at a far greater rate per employee than anyone else in the state and contribute more per teacher in FICA as well. We made those commitments as Lansing made theirs to us. As you keep forgetting or omitting, Lansing is our greatest funding source and our revenue from Lansing has been dropping annually and was reduced by $3,000,000 after they had made their promise to us. But we have kept our promise to you.

      Thanks again for your continued dialog.

      Brendan

  7. Glenn M. Watson

    Dr. Beyerlein:

    How can you continue to argue out of both sides of your mouth? One the one hand, you seemingly believe in “right-sizing”, while on the other, you moan about the 5 percent family drop in compensation you experienced last year. I will submit to you that many, many families within the district experienced a 100% drop in their compensation, and their home is worth 45-60% of what they owe on it. I’m afraid you will not find an audience sympathetic to your view unless you happen to live in a community of UAW members.

    So, for the fourth time, how do expect the district to operate when it loses revenue at a double-digit rate, bearing in mind that the bulk of its expenses are paying your union members? Your compensation model, which was based on the early 20th century automotive dynasty system, is no longer sustainable. This is indisputable. You cannot demand to be treated as a professional when you equally desire to be treated as a segment of a collective bargaining unit. Pick a side, realize the world is changing, and help the board solve this extremely difficult problem.

  8. Glenn M. Watson

    Brendan:

    If any district resident has any doubt as to how serious this situation is, the Grosse Pointe News article on January 28 (page 2) about the city of Grosse Pointe Shores shows that even a city as prosperous as this is not going to be tolerant of anything but fiscal responsibility based on the economic realities of today.

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